Nautilus Ins Co v. Cassady , 291 F. App'x 686 ( 2008 )

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 08a0463n.06
Filed: August 1, 2008
No. 07-5461
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
NAUTILUS INSURANCE COMPANY,
Plaintiff-Appellee,
v. ON APPEAL FROM THE UNITED
STATES DISTRICT COURT FOR THE
GLEN CASSADY; INTERSTATE PROPERTY EASTERN DISTRICT OF KENTUCKY
REMEDIATION, INC.,
Defendants-Appellants.
/
BEFORE: MERRITT, CLAY, and GILMAN, Circuit Judges.
CLAY, Circuit Judge. Defendants, Interstate Property Remediation, Inc., and its principal
owner, Glen Cassady, appeal from the district court’s order granting summary judgment to Plaintiff,
Nautilus Insurance Company, with respect to a bad faith action initiated after Nautilus reserved its
right to deny coverage under an insurance policy owned by Cassady and Interstate. For the reasons
that follow, we AFFIRM the judgment of the district court.
BACKGROUND
The instant appeal arises from a dispute regarding the scope of an insurance policy obtained
by Glen Cassady (“Cassady”) on behalf of Interstate Property Remediation, Inc. (“Interstate”) from
No. 07-5461
Nautilus Insurance Company (“Nautilus”). Cassady obtained commercial liability insurance
coverage from Nautilus after speaking with Pauline Williamson (“Williamson”), an insurance
representative at the Elite Agency, Inc. (“Elite”). During the conversation between Cassady and
Williamson regarding appropriate coverage levels, Cassady informed her that Interstate often did
work for CSX Railroad, which involved mowing grass and clearing right of ways. Cassady also
informed Williamson that he, and by extension Interstate, was “a jack of all trades and master of
none,” apparently to indicate that he engaged in a wide variety of work. (J.A. at 373)
To complete the process for purchasing a policy, Nautilus required Cassady to complete a
Commercial Application Form. After speaking with Cassady, Williamson filled out the application.
The application required Williamson to answer questions regarding Interstate’s business and
operations. In response to such questions, Williamson answered that Interstate was engaged in the
business of “mowing grass for railroads,” and indicated under a section entitled “Schedule of
Hazards” that Interstate was primarily in the business of “Landscaping-Gardening and drivers” as
well as “mowing grass for Railroads.” (J.A. at 37-42, 420). In response to a series of “yes” or “no”
questions, Williamson responded “no” to a question which asked whether Interstate contemplated
“any demolition exposure . . . .” (Id.) Cassady signed the application and acknowledged that
Nautilus would rely on the information contained therein to determine whether an insurance policy
would be issued to Interstate.
Upon receipt of Interstate’s Commercial Application Form, Nautilus issued a general liability
insurance policy with a limit of $1 million to Interstate. The general insurance policy contained the
following provisions:
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No. 07-5461
SECTION I – COVERAGES
COVERAGE [OF] BODILY INJURY AND PROPERTY DAMAGE
LIABILITY
1. Insuring Agreement:
a. We will pay those sums that the insured becomes legally
obligated to pay as damages because of ‘bodily injury’ or
‘property damage’ to which this insurance applies. We will
have the right and duty to defend the insured against any ‘suit’
seeking those damages. However, we will have no duty to
defend the insured against any ‘suit’ seeking damages for
‘bodily injury’ or ‘property damage’ to which this insurance
does not apply. We may, at our discretion, investigate any
‘occurrence’ and settle any claim or ‘suit’ that may result.
(J.A. at 43)
Additionally, Cassady signed and returned to Nautilus a General Change Endorsement form
which contained the following exclusions:
DEMOLITION AND BUILDING WRECKING CONDITIONAL
EXCLUSION
The following exclusion is added to Paragraph 2. Exclusions under
SECTION I – COVERAGES, BODILY INJURY AND PROPERTY
DAMAGE LIABILITY
This insurance does not apply to ‘bodily injury’ or ‘property damage’ for
demolition or wrecking of buildings or structures conducted by you unless coverage
was purchased for ‘Wrecking–buildings or structures’ and designated on the
Declarations.
The following additional exclusions apply to demolition or wrecking
operations:
(1) This insurance does not apply to ‘bodily injury’ or ‘property damage’
arising out of:
(a) The use of cranes, ball and chain, or similar apparatus; or
(b) The demolition or wrecking of any building or structure that has
an original height in excess of three stories.
(J.A. at 90)
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No. 07-5461
Following the issuance of this policy, Interstate contracted with CSX to work at a job site in
Johnstown, Pennsylvania. Although the nature of this contract is disputed by the parties, Interstate
was required to clear or tear down several one-story sheds located on the property. Interstate rented
a trackhoe to complete the duties enumerated in the CSX contract. On December 27, 2004, James
West, an employee of Interstate, was sent to the Johnstown site to tear down the sheds. Also present
was James Hale, who accompanied West to Johnstown and was on site while West removed the
sheds. During the CSX project, a track from the trackhoe struck Hale, seriously injuring him. As
a result of these injuries, both of Hale’s legs were amputated.
Following the accident, Hale filed suit against Interstate in Pennsylvania state court. After
being noticed with the suit, Interstate sought to invoke its insurance policy coverage through
Nautilus. In response, Nautilus sent Cassady a reservation of rights letter. Thereafter, Nautilus filed
suit seeking a declaratory judgment that it had no duty to defend or indemnify Interstate in Hale’s
personal injury suit. Instead, Nautilus claimed that Hale’s injuries arose from conduct that fell
outside of the scope of Interstate’s coverage. In particular, Nautilus asserted that they had no duty
to defend Interstate as a result of exemptions under the policy for bodily injuries resulting from
demolition activities and the exclusion for injuries resulting from the use of mobile equipment.
Additionally, Nautilus alleged that Cassady misrepresented the nature of Interstate’s business and
that the contract should be voided on that basis. Interstate, for its part, asserted a bad faith
counterclaim against Nautilus because of its handling, investigating and adjusting of Hale’s claim.
Before the district court, Nautilus filed a motion for summary judgment, asserting that it was
not required to extend coverage under Interstate’s policy. Nautilus also moved for summary
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No. 07-5461
judgment with respect to Interstate’s bad faith claim. Interstate moved for cross-summary judgment,
contending that Nautilus had an obligation to defend against Hale’s suit and to cover any resulting
judgment. The district court granted summary judgment in favor of Interstate, finding that the
removal of a one-story shed did not constitute “demolition” under the terms of the insurance policy.
The district court, however, granted Nautilus’ motion for summary judgment with respect to
Interstate’s bad faith claim. The parties settled the claims brought by Nautilus with respect to the
policy exclusions and misrepresentation. Interstate now appeals the district court’s dismissal of its
bad faith claim.
DISCUSSION
A. Standard of Review
This Court reviews a district court’s grant of summary judgment de novo. Monette v.
Electronic Data Sys. Corp., 90 F.3d 1173, 1176 (6th Cir. 1996). Summary judgment is appropriate
if, pursuant to Rule 56(c) of the Federal Rules of Civil Procedure, the pleadings, depositions,
answers to interrogatories, and admissions on file, together with the affidavits, if any, “show that
there is no genuine issue as to any material fact and that the movant is entitled to a judgment as a
matter of law.” Fed.R.Civ.P. 56(c). As the moving parties, Defendants bear the burden of showing
the absence of a genuine issue of material fact as to at least one essential element on each of
Plaintiff’s claims. See Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986). Plaintiff, as the non-
moving party, must then present sufficient evidence from which a jury could reasonably find for it.
See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252 (1986). This Court must then determine
“whether the evidence presents a sufficient disagreement to require submission to a jury or whether
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No. 07-5461
it is so one-sided that one party must prevail as a matter of law.” Id. at 251-52. In making this
determination, this Court must draw all reasonable inferences in favor of the non-moving party. See
National Enters., Inc. v. Smith, 114 F.3d 561, 563 (6th Cir. 1997).
B. Analysis
Interstate contends that the district court improperly granted summary judgment in favor of
Nautilus on Interstate’s claim that Nautilus denied coverage in bad faith. Specifically, Interstate
contends that the general liability insurance policy clearly provides coverage for the injuries
sustained by Hale and therefore Nautilus had no reasonable basis for its denial of coverage. We
disagree.
Under Kentucky law, to establish bad faith on the part of an insurer, a party must satisfy a
three-pronged test. An insured must prove: (1) that the insurer was obligated to pay; (2) that the
insurer lacked a reasonable basis in law or fact in denying the claim; and (3) that the insurer knew
there was no reasonable basis for denying the claim or acted with reckless disregard for whether such
a basis existed. Empire Fire & Marine Ins. Co. v. Simpsonville Wrecking Service, Inc., 880 S.W.2d
886, 888 (Ky. Ct. App. 1994). In the instant case, Interstate failed to establish a genuine issue of
material fact with respect to Nautilus’ “reasonable basis” for denying the claim. Indeed, we find that
Nautilus challenged Interstate’s coverage based on a debatable or reasonable interpretation of the
demolition exclusion.
As an initial matter, it is undisputed that Interstate did not purchase the demolition policy.
It is also undisputed that at the time of Hale’s accident, Interstate employees were engaged in a
project that involved the removal or tearing down of a one-story shed. The central dispute, therefore,
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No. 07-5461
is whether Nautilus reasonably determined that the removal of the one-story shed constituted
“demolition” within the meaning of Nautilus’ policy exclusion such that it had no duty to defend
Interstate in Hale’s personal injury suit.1
The general liability insurance policy contains the following disputed exclusion:
This insurance does not apply to ‘bodily injury’ or ‘property damage’ for
demolition or wrecking of buildings or structures conducted by you unless coverage
was purchased for ‘Wrecking–buildings or structures’ and designated on the
Declarations.
The following additional exclusions apply to demolition or
wrecking operations:
(1) This insurance does not apply to ‘bodily injury’ or
‘property damage’ arising out of:
(a) The use of cranes, ball and chain, or similar
apparatus; or
(b) The demolition or wrecking of any building or
structure that has an original height in excess of three
stories.
(J.A. at 90) (emphasis added). It is clear that the demolition exclusion is not a model of
draftsmanship. Indeed, when read as a whole, the demolition-wrecking exclusion is susceptible to
two reasonable readings and thus, the district court properly granted Nautilus’ motion for summary
judgment.
1
Interstate argues that the demolition exclusion is not applicable at all, regardless of this
Court’s interpretation of “demolition.” Instead, Interstate argues that Hale was not injured by the
actual demolition of the sheds on CSX’s property, but rather from the trackhoe that was utilized to
engage in the work in Johnstown. This is a distinction without a difference. The sole purpose of
Interstate’s presence in Johnstown was to remove the sheds, and Interstate rented the trackhoe for
that reason. Thus, whether Hale was injured from falling debris or the trackhoe, either injury would
have resulted from the destruction of the sheds.
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No. 07-5461
Under one interpretation, as Nautilus notes, the introductory paragraph can be read broadly
to exclude from coverage those bodily injuries resulting from “demolition or wrecking of buildings.”
The following paragraph can then be read as a limitation on policyholders who purchased coverage
for demolition activities. Such an interpretation would exclude from coverage those activities that
require the removal of structures from properties, regardless of the size of the structure. Again, it
is undisputed that Interstate’s contract with CSX required the removal of four one-story sheds from
CSX’s property. (J.A. at 414) (“Contractor will furnish superintendence, labor, equipment, and
materials required to demolish, remove and properly dispose of the buildings and platforms
identified above and as shown on the attached maps.”) Under a second interpretation, however, the
paragraph following the introductory paragraph can be read as limiting, qualifying or defining the
broad term “demolition” to mean the “demolition or removal of structures in excess of three stories.”
Indeed, as Interstate notes, it is plausible that the exclusion was meant to apply to larger scale
demolition activities.
Whether the policy could plausibly be read to extend coverage to Interstate, however, is not
the test. Indeed, Kentucky courts have held that, absent any misconduct, where a claim is fairly
debatable, “the insurer is entitled to debate that claim regardless of whether the debate concerns a
matter of fact or one of law.” Empire Fire & Marine Ins. Co., 880 S.W.2d at 889-90. In the instant
case, Interstate has put forth no additional evidence of misconduct on the part of Nautilus, beyond
the reservation of rights, to support its bad faith claim. Thus, the district court properly granted
summary judgment in favor of Nautilus on Interstate’s bad faith claim.
CONCLUSION
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No. 07-5461
For the reasons discussed above, we AFFIRM the judgment of the district court.
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